THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY

Required Report - public distribution Date: 12/18/2015 GAIN Report Number: ID1546

Indonesia Retail Foods Retail Foods Update

Approved By: Thom Wright Prepared By: Fahwani Y. Rangkuti & Thom Wright

Report Highlights: While traditional markets still account for the majority of retail food sales in Indonesia, modern retail holds a significant share and is growing. Traditional retail outlets, including wet markets and independent grocery stores, are gradually being replaced by modern outlets. The burgeoning hypermarket, supermarket and minimarket sectors offer opportunities for U.S. food products. U.S. apples, table grapes, processed vegetables (french fries), processed fruits (dates, raisins), as well as juices enjoy a prominent position in Indonesia's retail outlets and traditional markets. Further growth and changes in consumer preferences, along with improved refrigeration and storage facilities, will also

create additional opportunities for U.S. exporters. Post: Jakarta Trends and Outlook Indonesia is the 4th most populous nation in the world, with a population of approximately 258 million in 2015. Around 50 percent of the population is between the ages of 5 and 34 years. Emerging middle class consumers are well educated and have a growing interest in imported goods, particularly for consumer products such as processed foods. In 2014, GDP distribution at current market prices showed that household consumption expenditures were distributed 26.77 percent on food items and 29.3 percent on non-food items (2014 GDP was $886 billion/IDR 10,542 trillion). The middle class population expanded to 56.7 percent of the total population (2013) from 37 percent (2004). (The middle class is defined as the segment of the population able to spend $2 to $20 a day, as per the “Satu Dasawarsa Membangun Untuk Kesejahteraan Rakyat – A Decade of Development for People Welfare,” (Cabinet Secretary April 2014)). Hypermarkets, supermarkets, and minimarkets continue to develop in Indonesia as purchasing power increases. Development is primarily occurring in urban areas, and the prospects for the continued retail sector expansion throughout Indonesia remain promising. However, land availability and receiving necessary permits from local government officials can be a constraint. Several Indonesian regulations play an important role in modern retail expansion:  Presidential Regulation No 111/2007 states that supermarkets smaller than 1,200 square meters and minimarkets below 400 square meters should be owned by Indonesian investors.  Ministry of Trade Regulation (MOT) No. 53/2008 (replaced by MOT No 70/2013) regulates the number, and distance of new modern outlets from traditional markets. The regulation also provides guidelines defining modern retail outlets based on floor area, sales system, goods traded, listing fees, discounts, and promotional costs.  MOT Regulation No. 70/2013 and its amendment, Regulation No. 56/2014, “Guidelines for Structuring and Development of Traditional Markets, Shopping Malls, and Modern Stores/Outlets” limits private label items sold in modern outlets to only 15 percent of stock keeping units (SKU). Stores must sell a minimum of 80% domestic products, except for specialty stores where product uniformity is required and cannot be sourced from a brand with a production base in Indonesia. Minimarkets are not allowed to sell fresh products in bulk. Alcoholic beverages cannot be sold at minimarkets located near housing complexes, places of worship, bus and train stations, hospitals, youth centers, and schools). Ownership of retail outlets is limited to 150 stores. Companies exceeding this cap must franchise outlets exceeding 150. Retailers operating more than 150 stores prior to regulation’s implementation (MOT 56/2014 implemented September 17, 2014) are permitted to continue operating with that number of stores. Stores that sell less 80% locally produced products have been provided a grace period of

two years to adapt.  The Empowerment and Protection of Farmer Law 19/2013 could potentially limit the expansion of modern retail outlets that are not owned or developed in cooperation with Farmer Groups and Associations, Cooperatives, and/or other Farmer Economic Institutions in their Agricultural commodity production district. Post notes that as of December 2015, this regulation has not been enforced.  MOT circular letter 1310/2014 dated December 22, 2014 instructs local authorities (governors, regents, and provincial/regional/district mayors in areas that have not created a land use plans to suspend the establishment of new retail outlets. However, Economic Reform Package I, issued in September 2015, allows local authorities to issue temporary permits. Local government bodies have also limited permits for new convenience stores due to protests from traditional market retailers. They enforce zoning and operating hour rules on convenience stores and minimarket franchises (Presidential Decree No 112/2007 regulates the operating hours from 10 am – 10 pm Monday to Friday and 10 am to 11 pm on Saturday and Sunday). The food retail sector is concerned by issues surrounding the issuance of imported product registration numbers (ML). All packaged foods imported for retail purposes must obtain an ML number. Importers report that obtaining the number is time consuming, and that requirements can be confusing and excessive. A number of other persistent market access issues, such as import permits, quotas, and frequently changing trade regulations continue to threaten U.S. food exports intended for the Indonesian retail sector. Enforcement of food product regulations often lacks transparency and consistency. The lack of infrastructure, including, but not limited to poor port facilities, supply chain management, and cold chain facilities also creates a drag on the wider distribution of food products throughout Indonesia. Grocery prices are growing as a result of the weakening of Indonesian Rupiah (IDR), increasing regional wages, and restrictive import laws. Farmer access to training, technology and credit remains limited, thus limiting agricultural productivity growth (relative to demand growth) and driving up prices. Supply chain challenges and logistical barriers further inhibit production growth and add to production costs. I. MARKET SUMMARY The Indonesian retail sector began its rapid expansion in 1999, when a Presidential Decree (No. 96/2000 and 118/2000) allowed Carrefour, a French retailer, to expand retail operations in Jakarta. As other retailers followed, the Indonesian retail sector became more competitive, benefitting consumers and taking market share from traditional retail outlets. Foreign retailers in Indonesia include Carrefour (now locally owned and operated by CT Corp/PT Trans Retail, under the name Trans Mart), Giant, Lotte Mart (formerly Makro), Lion Superindo, Spar, Aeon, Circle K, Seven Eleven, Lawsons, Family Mart and Ministop. Some modern retailer chains have multi-format outlets. Hypermarket, supermarkets,

convenience shops and minimarkets are all present in Jakarta. The first Aeon supermarket opened at the end of March 2015 in Jakarta (BSD City, Tangerang Selatan) and is owned by PT. AMSL Indonesia. Aeon’s second location will be opened in North Jakarta in early 2017. SaveMax Super Grosir, owned by PT. Emporium Indonesia (Gunung Sewu Group), has opened two Supermarkets located in the Jakarta region (Tangerang City and Cibubur). PT. Ramayana Lestari Sentosa Tbk (Ramayana) and SPAR International B.V. have opened 8 SPAR Supermarkets in Jakarta and its surrounding areas. Jason Supermarkets (owned by Hero Group), launched supermarkets in Jakarta, while Loka Supermarkets (owned by Mega Mahadana Hadiya – Trakindo Group) has opened supermarkets in Malang - East Java, Tangerang, and Cibubur. Matahari Group opened its first “smart club,” Trader Wholesale, in Tangerang on December 17, 2015. Lulu Group International of Abu Dhabi, managed by PT EK Prima Ekspor Indonesia, will open hypermarket and department stores in Java and Bali starting 2016. Convenience stores are expanding rapidly in Indonesia. Following the introduction of 7-Eleven in 2009, the stores have grown in popularity amongst young consumers and students. Convenience stores differ from Indonesian minimarkets in that they offer fewer SKUs than minimarkets while offering ready to eat foods and a dining area. Locally owned minimarkets are progressively expanding to residential and office areas throughout Java, Bali and other provinces. Minimarkets are in direct competition with traditional independent small grocers (warungs), on the basis of price, cleanliness, food safety, and comfort. Independent small grocers face this challenge by offering personalized, flexible services to their community. In 2012, PT. Sumisho E-Commerce Indonesia (a joint venture company between Sumitomo Corporation –Tokyo and PT. Sumitomo Indonesia) launched Sukamart as an on-line grocery store in Jakarta. Table 1. Indonesia: Growth of Grocery Retail Sales and Outlets Number Type of Outlets Value Growth (%) Number of No. Outlets Growth (%) Outlets 20132014 2009-2014 20132009-2014 (,000) (CAGR) 2014 (CAGR) in 2014 Convenience Stores 19.0 34.0 22.8 13.6 17.8 Hypermarkets 16.1 12.7 0.3 13.5 13.3 Supermarkets 13.3 15.0 1.4 7.2 3.2 Traditional Grocery 6.6 11.2 4,451.9 -1.7 -0.6 Retailers Source: Euromonitor; Note: CAGR: Compound Annual Growth Rate

There are a variety of specialty food stores serving high-end consumers in major urban areas. Ranch Market, The FoodHall, Grand Lucky, etc. provide premium grocery shopping and imported goods. Fruit boutiques, such as Total Buah and All Fresh are common and western-style bakeries are also growing due to new consumer awareness of western style breads and pastries. The Kalbe E-store offers online

retail and home delivery services for grocery and health products. Many of these stores have suffered from import registration number (ML) requirements for processed food and retail packaging issues. Figure 1. Indonesia Retail Sales Value Share (%)

Source: Euromonitor

Food Products and Service Offered by Retailers Hypermarkets and supermarkets offer a wide range of food and beverage products and are generally located as anchor stores in shopping centers. One way supermarkets differentiate themselves from traditional retailers is by marketing high-quality fresh produce, a substantial portion of which is imported. Indonesian middle and upper income level consumers are increasingly shopping at these stores.

Table 2. Indonesia: Sales of Packaged Food in 2014 Product

Volume (000 ton)

Retail

Growth 2013/2014 (%)

Value (IDR Trillion) Retail

Baby food Bakery Canned/preserved food Chilled processed food Confectionery Dairy Dried processed food Frozen processed food Ice cream Noodles Oils and fats Sauces, dressings and condiments Spreads Sweet and savory snacks Meal replacement, Pasta, Ready meals, Snack Bars, Soup

279.21

7.13

30.02

840.93 107.05 17.98 285.07 1,37.98 9,110.99 79.26 62.96 1,448.75 834.38 496.06

4.73 9.34 9.36 4.82 6.16 5.20 8.51 9.70 7.33 7.33 .71

38.87 6.23 1.49 22.85 30.85 101.34 7.40 4.12 27.42 16.74 13.18

17.03 319.46 12.19

6.75 6.73 30.70 (meal replacement), 6.5 (pasta), 6.02 (ready meals), 19.77 (snack bars), 6.83 (soup)

1.13 14.98 2.49

Source: Euromonitor

Hypermarket and supermarket retailers usually contain in-store bakeries, cafés and restaurants, and prepared meals, with grocery products typically contributing about 65 percent of total sales. Additional in-store services beyond typical food retailing are expected to grow. These include credit and debit card services, ATMs, floral departments, laundry services, home delivery services, in house bakery production, and delis/restaurants. Indonesian hypermarkets/ supermarkets also offer pre-paid mobile phone credits, liquefied petroleum gas (LPG), and store credit cards in cooperation with banks. Minimarkets, convenience stores, and other shops carry a wide range of convenience food items such as readymade meals, bakery products, processed foods, ice cream, and beverages. They sometimes carry a limited offering of fresh fruits and are open 24 hours. These stores are found throughout Indonesia’s major urban centers and are also co-located with gasoline stations, such as Bright, Circle K, Bonjour, Indomaret and Alfamart. In addition to food and beverages, minimarkets also provide train tickets, concert and sporting event tickets, pre-paid mobile phone vouchers, ATMs, e-money top ups, airline tickets (such as Citilink, Garuda Indonesia, etc.), laundry, bill payment services (electricity, motorcycle loan payments), BNI bank and Western Union remittances, taxi ordering, courier services, money changers, online shopping and delivery (within the Jakarta region) as well as payment transaction for online shopping in other on-line shops (BukaLapak.com) and GOI health on-line insurance premium counters (BJPS). Franchising is driving the rapid growth of minimarkets and convenient stores. While traditional small grocers (warungs) may not be able to offer varieties of products and services offered by minimarkets, they do sell local food and beverage products familiar to the majority of consumers. This differentiation, along with location, helps them remain competitive against organized retail. Traditional markets also remain an important retailer in Indonesia. A 2010 Nielsen Shopper trends survey showed that buyers purchased 53 percent of fresh vegetables, 70 percent of fresh meat,

and 67 percent of fresh fish in traditional markets. Like small grocers, they rely on personalized services, local product offerings, and location to remain competitive. Table 3. Indonesia: Retail (Off trade and On-trade) Beverage Sales in 2014 Product Bottle Water Carbonates Concentrates Juice RTD Coffee RTD Tea Sport and Energy Drinks

Value (IDR Trillion) 22.57 13,97 9.35 2.65 0.39 25.88 1.55

Volume (million liters) 17,745.6 943.6 106.8 167.1 16.0 2,145.4 621.5

Volume growth (%) 2013-2014 6.5 7.3 4.0 7.6 13.5 9.5 11.5

Source: Euromonitor; Note: Most of the products by volume (97%) are sold off-trade

A University of Adelaide study (Hery Toiba, 2011) showed that quality perceptions amongst Indonesian consumers also favor traditional markets in several categories. For example:  Price: Indonesian consumers tend to believe that traditional retail has lower costs across all categories except dairy and processed food.  Quality & Safety: Indonesian consumers tend to believe that quality &food safety is better assured by traditional retailers for meat and seafood, while modern retail is perceived to provide safer fruits, dairy and processed foods.  Product information: Indonesian consumers reported that they regard modern retail as more transparent and forthcoming with product information across all categories except vegetables

Figure 2. Indonesia: Sales in Modern Retailers (IDR Trillion)

Source: Euromonitor

Modern Retail Market Growth Indonesian supermarkets/hypermarkets experience their peak hours during weekends with 34 to 45 percent of shopping occurring at these times. Minimarket peak hours are usually at night. Traditional outlets such as neighborhood stores and wet markets experience heaviest traffic on weekday mornings. A Nielsen report claims that Indonesian consumers prefer to purchase certain specialty items from the organized sector (dairy, vitamin and personal care products), while commodity goods (instant noodles, cooking oil, soy sauce) continue to be procured from traditional sources. The ‘recreation’ function of modern outlets is important in Indonesia, with 79 percent of consumers visiting supermarkets/hypermarkets with their families. This trend is encouraged by Jakarta’s numerous shopping malls and growing mall culture. Conversely, more than 65 percent of consumers prefer to visit traditional markets alone. As a relatively new concept, consumers continue to familiarize themselves with modern retail, indicating potential for future growth of the sector. In 2014 the monthly average expenditure per capita for food was IDR 388,350 ($32.64). This averages approximately 50 percent of total monthly expenditures per capita. A breakdown of average expenditures is as follows: Figure 3. Indonesia: Food Expenditure (%)

Source: Statistic Indonesia

Distribution Channels Wholesale and hypermarket outlets procure from domestic suppliers or directly from manufacturers and importers. Suppliers of small retail outlets deliver the products to retailer’s distribution center. Ministry of Agriculture (MOA) and MOT regulations limit the sale of imported beef to the hotel and restaurant industry. Indonesian regulations also prohibit retailers from purchasing imported horticultural products directly from importers, limiting product availability and increasing prices. Table 4: ADVANTAGES AND CHALLENGES FACING U.S. PRODUCTS MARKET ADVANTAGES CHALLANGES Large Consumer Base: Indonesia has a population of 258 million people in 2015 The distribution system on the island of Java is improving, providing increased access to 57.06 % population. The availability of imported products will be accommodated by the rapid growth of the modern retail sector; Japanese, Korean, and Western restaurant chains; bakeries and a well-developed tourism industry Many Indonesian consumers are aware of the quality and safety of the U.S. products. Low Duties: Duties on most food are 5%

Weak purchasing power of the majority of the population. Infrastructure, including ports and cold storage facilities outside of the main island of Java, are poorly developed. Import regulations are often complex and non-transparent, thus requiring close business relationships with a local agent. Getting an ML number for imported retail packaged food products is complicated but required. Labels must be written in Indonesian and attached before entering Indonesia. Prices of imported products are relatively high compared to locally produced products. Consolidated shipments with products from several suppliers are

except for 153 value added food product items (GAIN report ID1530) More urban women entering the workforce with less time available for shopping and cooking increasingly focusing on convenience. Some multinational companies have commissary and catering services that need imported products.

U.S. Fresh Food of Plant Origin (FFPO) safety control system has been recognized. The U.S. horticulture products are allowed to enter Tanjung Priok – port of Jakarta.

GOI approved a number of several U.S. meat and many U.S. dairy establishments to export products to Indonesia. Indonesia also does not produce sufficient quantities of beef, dairy products, tree nuts, temperate zone fresh fruit and vegetables, and pet food.

often more cost effective for Indonesian retailers. This increases documentation problems. Product shelf life should be considered for shipments to Indonesia due to the extended transportation and inconsistent (nontransparent & unpredictable) custom clearance procedures & time. Third-country competition and promotion remains strong, especially from Australia, New Zealand and China. Food product imports from Malaysia, Philippines, Thailand and Vietnam are growing. Bilateral free trade agreements provide opportunities to competitors. The GOI intends to review FFPO recognition every two years. Current regulations stipulate that only three sea ports and one airport are allowed as a horticultural entry points. Approximately 39 horticultural products must have an import recommendation from Indonesian Ministry of Agriculture, and import permit from Ministry of Trade before imported to Indonesia. Animal-based food must be certified “halal”. Import recommendations from MOA and MOT are required to obtain an ML. U.S. freight costs are high relative to competing origins

II. ROAD MAP FOR MARKET ENTRY Entry Strategy An effective way to enter the Indonesian market is to appoint an agent. An agent can help assure the widest product distribution as well as undertake the marketing efforts necessary to build product awareness. In some situations, it may make sense to sell directly to supermarkets and/or to appoint them as an exclusive distributor. This is particularly recommended for specialty products which are unlikely to generate volumes sufficient to merit the interest of an agent. Initial sales efforts in Indonesia should nevertheless include visits with potential agents as well as with key retailers to gain an understanding of the market.

Market Access for Imported Food Products Labeling Requirements for food product labeling (primarily for packaged food for retail sale) are broad in scope. The National Agency for Drug and Food Control (BPOM) regulations require labels to be written in

Indonesian and to note GMO-derived ingredients. As of January 2013, supplementary labels should be affixed prior to customs clearance (before arriving in Indonesia). Statements or claims on the benefit of the food product shall only be included if they are supported by scientific facts which can be accounted for. In addition to BOPM labeling regulations, exporters are expected to comply with the new Food Law 18/2012, and the Consumer Protection Act of 1999. Imported Product Registration Number (ML) All processed food products imported in retail packaging must be registered with BPOM before they are allowed to be imported. The registration process should be conducted by a local agent or importer. The process for registration of food is complex, often non-transparent, costly, and time consuming due to the detailed requirements regarding supporting documentation that should be carried out before shipping. However, the ML registration processed has improved slightly by the implementation of the Eregistration for low risk processed food products (707 kinds of food products) since early 2013. BPOM regulations require importers to apply for an import recommendation for animal based food products, including processed products, from the Director General of Livestock Services, Ministry of Agriculture. This recommendation must be obtained before an exporter applies for an ML number. Entry Permit (SKI) In March 2008, BPOM released a regulation (amended in 2013 and replaced by BPOM regulations No.12 & 13/2015) which stated that all imported food material/ingredients, including processed foods, must obtain an entry permit (SKI) from the head of BPOM for every shipment. The SKI is needed to release the products from customs. To obtain the permit, an importer must provide supporting data and documents. Horticultural and Animal-Based Food Products MOA and MOT regulations state that the GOI will allocate import quantities for imported horticultural products every six months and meat products every four months (Note that the GOI claims it will approve any quantity the importer requests). These regulations limit the availability of imported fresh fruits in retail outlets, as more than 60 percent of hypermarket fruit sales are of imported fresh fruit. This regulation also hinders meat imports, as it requires meat to be ordered and shipped within four months from the issuance of the import recommendation. Since 2011, MOA and MOT regulations limit the sale of imported beef to the hotel and restaurant industry. Halal In September 2014, Indonesia passed a law governing halal products (33/2014). The law makes halal certification mandatory for all food, beverage, drugs, cosmetics, chemicals, organic and genetically modified products sold in Indonesia, as well as machinery and equipment used in processing these products. Companies have three years (from October 2014) to comply with the new law. In the

meantime, companies have been instructed to follow existing Indonesia Ulama Council (MUI) halal certification procedures. The new law also states that the Indonesian government will establish a new institution called the Halal Product Guarantee Agency (Badan Penyelenggara Jaminan Produk Halal BPJPH) to issue halal certificates. Once formed, the BPJPH will assume the role currently fulfilled by the MUI. As of December 2014, implementation of the halal law remained uncertain, partly due to resource restraints. Duties and Taxes Although most food and agricultural product import duties are 5 percent, most imported products are also assessed a value added tax of 10 percent and a sales tax of 2.5 percent. On July 2015, The Ministry of Finance (MOF) issued a regulation on tariff changes to value-added goods. The regulation covered 153 products including coffee, tea, sausages/processed meat/fish/other fish products, sugar and confectionery items, chocolate, pasta, bread, pastry, biscuits ,preserved vegetables/fruit/nuts, sauces, ice cream, tempeh, wine, fermented beverages, and liqueurs. New tariffs vary from 10 to 30 percent although fermented beverage and liqueur (alcoholic beverages) tariffs are 90 percent (HS Code 2204, 2205, 2206) and 150% (HS Code 2208). Alcoholic beverages are imported based on a quota set by MOT every April. In January 2014, MOF implemented a new excise tax for ethyl alcohol, beverages, and concentrates containing ethyl alcohol. Table 5. Indonesia: Excise Tax for Ethyl Alcohol and Products Containing Ethyl Alcohol Type

Ethyl Alcohol content

Excise Tax (IDR per liter)

Domestic Product

Import

I. Ethyl alcohol or ethanol All kinds of ethyl alcohol, level content, and type

20,000

20,000

II. Beverages containing ethyl alcohol A 5% or less B More than 5% up to 20% C More than 20%

13, 000 33,000 80,000

13,000 44,000 139,000

100,000

100,000

III. Concentrate containing ethyl alcohol All concentrates, content level and type, as a raw material or processing aid in beverages contain ethyl alcohol production

Starting mid-April 2015, MOT 6/2015 prevents “A-category alcoholic beverages” (alcohol content